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Lear Capital: Does the Gold Price Make Sense?

Central banks are buying more than ever and producers claim it is more costly than ever to get out of the ground, yet the gold price continues to slip lower.

According to World Gold Council Reports, "central-bank gold purchases in the third quarter more than doubled from the second quarter and were almost seven times higher than a year earlier as countries continued to diversify reserves." Last June, Standard Chartered released results of a survey of more than 300 producers, and determined that future supply of gold would fall well short of levels previously anticipated.

These facts alone should be enough to drive gold prices to even higher highs. Instead, it appears the gold price is headed toward lower levels of support. Some suggest a level around the 150 day moving average of $1605 an ounce, will be reached.

So, how do we explain the recent gold price action? First, realize gold prices, even at $1605 an ounce, would still represent a 20% gain on the year. Stocks, on the other hand, are negative for the year with the S&P leading the way down with more than a 6% loss at today’s current trading level. Adding this to the equation may explain one reason gold is selling off. It’s one of very few assets that can be sold for a profit.

Let me give you an uber simple example of what could be taking place. Let’s use a $100,000 portfolio to make it easy to illustrate. Then, let’s say I started the year with 80% of my portfolio in stocks and 20% diversified into gold. That’s $80,000 and $20,000 respectively. If my stocks are down 5%, and I see a further decline ahead and sell, I have lost $4000 on the year. My gold, on the other hand, up at least 20%, would provide me with a $4,000 gain. This means I can sell my gold for perhaps zero tax consequence as gold gains offset my stock losses.

Yes, this is a very simple illustration with many variables. So simple it may seem inconsequential but when you multiply the amounts in play and consider trillions of dollar in invested money, you can see how important it could be for many investors to sell metals, essentially tax free now, to offset other losses.

This would be especially true if stock investors see even greater losses ahead. Why wait around when losses could mount to levels so high, a complete tax write-off may never take place.

Are greater market losses coming? In a November 17, article, Jim Cramer, warns us that Europe could be a total disaster, driving the Dow down to 8000. Now, I believe things get a little clearer. If everyone who owns stocks and gold is compelled to sell, first to avoid further market losses and secondly, to effectively take tax-free metals profits, that could explain a joint sell-off.

If this be the case, the next question is, how long can this go on. It is estimated that of the total of investable money out there, still only 1% of that amount is held in gold or precious metals. There just isn’t enough precious metals in portfolios to facilitate a prolonged sell-off in stocks even if every ounce of gold had to be sold to cover stock losses.

I’m not suggesting this is the only reason people are selling off precious metals. I do think much of the selling, though, is profit motivated and voluntary. But, let’s face it, others are being forced to sell. It could be to cover margin calls or simply because times are tough and money is needed. I don’t think I need to remind you, but we are still in the midst of a recession and Christmas is coming.

Whatever reasons exist for selling, the reasons for owning should be equally as strong, perhaps more so. Central banks aren’t buying tonnes of gold because they think the price is going down. It’s a currency play. I mean how much can you love anyone’s currency when all you have to do is print more when it runs out?

If you are one of the few that is fortunate enough to have money to invest, now may be the last best chance you have to add some gold to your savings and retirement accounts. Remember you can add gold or silver to an IRA. When it is held in an IRA it is treated, tax-wise, the same way as any other investment.

And if you want to track where the gold price is headed from here, get the blockbuster video, The End Of The Dollar to learn more. Does this all make sense now? I welcome your comments.